[Federal Register Volume 67, Number 37 (Monday, February 25, 2002)]
[Notices]
[Pages 8536-8539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-4374]


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FEDERAL TRADE COMMISSION

[Docket No. 9297]


American Home Products Corp.; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the complaint 
previously issued and the terms of the consent order--embodied in the 
consent agreement--that would settle these allegations.

DATES: Comments must be received on or before March 15, 2002.

ADDRESSES: Comments filed in paper form should be directed to: FTC/
Office of the Secretary, Room 159-H, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580. Comments filed in electronic form should be 
directed to: [email protected], as prescribed below.

FOR FURTHER INFORMATION CONTACT: David Pender, Bureau of Competition, 
600 Pennsylvania Avenue, NW., Washington, DC 20580, (202) 326-2549.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec. 3.25(f) 
of the Commission's rules of practice, 16 CFR 3.25(f), notice is hereby 
given that the above-captioned consent agreement containing a consent 
order to cease and desist, having been filed with and accepted, subject 
to final approval, by the Commission, has been placed on the public 
record for a period of thirty (30) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for February 19, 2002), on the World Wide Web, at ``http://www.ftc.gov/os/2002/02/index.htm.'' A paper copy can be obtained from 
the FTC Public Reference Room, Room 130-H, 600 Pennsylvania Avenue, 
NW., Washington, DC 20580, either in person or by calling (202) 326-
2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. Comments filed in paper form should 
be directed to: FTC/Office of the Secretary, Room 159-H, 600 
Pennsylvania Avenue, NW., Washington, DC 20580. If a comment contains 
nonpublic information, it must be filed in paper form, and the first 
page of the document must be clearly labeled ``confidential.'' Comments 
that do not contain any nonpublic information may instead be filed in 
electronic form (in ASCII format, WordPerfect, or Microsoft Word) as 
part of or as an attachment to e-mail messages directed to the 
following e-mail box: [email protected]. Such comments will be 
considered by the Commission and will be available for inspection and 
copying at its principal office in accordance with Sec. 4.9(b)(6)(ii)

[[Page 8537]]

of the Commission's rules of practice, 16 CFR 4.9(b)(6)(ii)).

Analysis To Aid Public Comment

    The Federal Trade Commission has accepted for public comment an 
agreement and proposed consent order with American Home Products 
Corporation. The proposed consent order would settle charges that AHP 
unlawfully agreed with Schering-Plough Corporation to delay selling its 
generic version of Schering's K-Dur 20, in exchange for payments from 
Schering. The proposed consent order has been placed on the public 
record for 30 days to receive comments by interested persons. The 
proposed consent order has been entered into for settlement purposes 
only and does not constitute an admission by AHP that it violated the 
law or that the facts alleged in the complaint, other than the 
jurisdictional facts, are true. In July 2001, AHP advised its customers 
that it intends to phase out its oral generic drug product line.

Background

    Schering develops and markets brand name and generic drugs, as well 
as over-the-counter health care and animal care products. Schering 
manufactures and markets an extended-release micro-encapsulated 
potassium chloride product, K-Dur 20. K-Dur 20, marketed as a brand 
name drug, has sales over $200 million per year. K-Dur 20 is used to 
treat patients who suffer from insufficient levels of potassium, a 
condition that can lead to serious cardiac problems.
    AHP develops and markets brand name and generic drugs, as well as 
over-the-counter medications. ESI Lederle, Incorporated, a division of 
AHP, received tentative approval from the Food and Drug Administration 
in May 1999 for a generic version of Schering's K-Dur 20.
    Upsher-Smith Laboratories, Inc. develops and markets brand name and 
generic drugs. Upsher-Smith received final approval from the Food and 
Drug Administration in November 1998 for a generic version of 
Schering's K-Dur 20.
    Generic drugs are chemically identical to their branded 
counterparts, but typically are sold at substantial discounts from the 
branded price. A Congressional Budget Office Report estimates that 
purchasers saved an estimated $8-10 billion on prescriptions at retail 
pharmacies in 1994 by purchasing generic drugs instead of the brand 
name product. \1\
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    \1\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
Industry at xiii, 13 (July 1998).
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    The Drug Price Competition and Patent Term Restoration Act of 1984, 
commonly referred to as ``the Hatch-Waxman Act,'' establishes certain 
rights and procedures in situations where a company, such as AHP or 
Upsher, seeks FDA approval to market a generic product prior to the 
expiration of a patent or patents relating to a brand name drug upon 
which the generic is based. In such cases, the applicant must: (1) 
Certify to the FDA that the patent in question is invalid or is not 
infringed by the generic product (known as a ``paragraph IV 
certification''); and (2) notify the patent holder of the filing of the 
certification. If the holder of patent rights files a patent 
infringement suit within 45 days of the notification, FDA approval to 
market the generic drug is automatically stayed for 30 months, unless 
before that time the patent expires or is judicially determined to be 
invalid or not infringed. This automatic 30-month stay allows the 
patent holder time to seek judicial protection of its patent rights 
before a generic competitor is permitted to market its product.
    In addition, the Hatch-Waxman Act provides an incentive for generic 
drug companies to bear the cost of patent litigation that may arise 
when they challenge invalid patents or design around valid ones. The 
Act, as currently interpreted, grants the first company to file an ANDA 
in such cases a 180-day period during which it has the exclusive right 
to market a generic version of the brand name drug. No other generic 
manufacturer may obtain FDA approval to market its product until the 
first filer's 180-day exclusivity period has expired.
    Upsher-Smith was the first company to file an ANDA for a generic 
version of Schering's K-Dur 20. Upsher-Smith filed a paragraph IV 
certification with the FDA, stating that its product did not infringe 
any valid patent held by Schering covering K-Dur 20. In 1995, Schering 
sued Upsher-Smith for patent infringement. The complaint alleges that 
at all times relevant herein, FDA final approval of an ANDA for a 
generic version of K-Dur 20 for anyone other than Upsher-Smith was 
blocked. Pursuant to the Hatch-Waxman Act, Upsher-Smith was eligible 
for the right to a 180-day Exclusivity Period for the sale of a generic 
version of K-Dur 20. The complaint further alleges that as a result, no 
company could obtain final FDA approval of an ANDA to market or sell a 
generic version of K-Dur 20 until 180 days after Upsher-Smith first 
sold its product, or until Upsher-Smith's exclusivity right is 
relinquished, forfeited or otherwise expired.
    ESI was the second company to file an ANDA for K-Dur 20. ESI also 
filed a paragraph IV certification with the FDA stating that its 
product did not infringe any valid patent held by Schering covering K-
Dur 20. In 1996, Schering sued ESI for patent infringement.

The Challenged Agreements

    The complaint challenges unlawful agreements between Schering and 
Upsher-Smith and among Schering, AHP and ESI to delay the entry of low-
cost generic competition to Schering's highly profitable prescription 
drug K-Dur 20. According to the complaint, when confronted with the 
prospect of competition to K-Dur 20 through generic entry by Upsher-
Smith and ESI, Schering entered into these agreements that kept Upsher, 
ESI and all other potential generic competitors out of the market. The 
complaint alleges that the Upsher-Smith/Schering agreement delayed the 
start of Upsher-Smith's 180-day Exclusivity Period until September 2001 
and, as a result, the entry of competition from other generic 
manufacturers until March 2002.
    With respect to AHP and ESI, the complaint alleges that in January 
1998, Schering, AHP, and ESI reached an agreement to settle their 
patent litigation. Pursuant to that agreement: Schering agreed to pay 
ESI up to $30 million; AHP and ESI agreed to refrain from marketing the 
allegedly infringing generic version of K-Dur 20 or any other generic 
version of K-Dur 20, regardless of whether such product would infringe 
Schering's patents, until January 2004; AHP and ESI agreed to refrain 
from marketing more than one generic version of K-Dur 20 between 
January 2004 and September 2006, when the K-Dur 20 patent will expire; 
and AHP and ESI agreed not to conduct, sponsor, file or support a study 
of the bio-equivalence of any product to K-Dur 20 prior to September 
2006. Schering agreed to pay ESI $5 million up front; an additional $10 
million if ESI could demonstrate that its generic version of K-Dur 20 
was able to be approved by the FDA under an ANDA on or before June 30, 
1999; and another $15 million for licenses to two generic products that 
ESI was developing.
    The complaint further alleges that the patent litigation between 
Schering and ESI was dismissed. Schering has paid ESI over $20 million 
and continues to make payments under the terms of their agreement. 
Schering has made no sales to date of the two products it licensed from 
ESI.

[[Page 8538]]

Competitive Analysis

    Generic drugs can have a swift marketplace impact, because 
pharmacists generally are permitted, and in some instances are 
required, to substitute lower-priced generic drugs for their branded 
counterparts, unless the prescribing physician directs otherwise. In 
addition, there is a ready market for generic products because certain 
third-party payers of prescription drugs (e.g., state Medicaid programs 
and many private health plans) encourage or insist on the use of 
generic drugs wherever possible.
    The complaint charges that the challenged agreement among Schering, 
AHP and ESI injured competition by preventing or discouraging the entry 
of generic K-Dur 20. The complaint also alleges that by making cash 
payments to ESI, Schering induced it to agree to delay launching its 
generic version of K-Dur 20. According to the complaint, absent those 
payments, ESI would not have agreed to delay its entry for so long. The 
complaint charges that by making cash payments to ESI, Schering 
protected itself from competition from ESI until 2004. The complaint 
also alleges that without lower-priced generic competition from Upsher-
Smith and ESI, consumers, pharmacies, hospitals, insurers, wholesalers, 
government agencies, managed care organizations, and others are forced 
to purchase Schering's more expensive K-Dur 20 product.

The Proposed Order

    The proposed order is designed to remedy the unlawful conduct 
charged against AHP in the complaint and prevent recurrence of such 
conduct. As described more fully below, the proposed order would 
essentially prohibit two categories of conduct:
     Agreements in which the NDA holder makes payments to an 
ANDA filer and the ANDA filer agrees not to market its product for some 
period of time (except in certain limited circumstances) (Paragraph II 
deals with agreements that resolve a patent infringement dispute and 
Paragraph IV covers ``interim'' agreements that apply during the 
pendency of ongoing patent litigation); and
     Agreements between the NDA holder and an ANDA filer in 
which the generic competitor agrees not to enter the market with a non-
infringing generic product (Paragraph III).
    The proposed order would apply to AHP whether it is acting as 
potential generic competitor (an ANDA filer) or as a branded drug 
seller (an NDA holder). As noted above, AHP has advised its customers 
that it intends to phase out its oral generic pharmaceutical product 
line. It will continue to develop, manufacture, and market brand name 
drugs and injectable generic drugs. Notwithstanding AHP's plans to 
phase out its oral generic products--the line of business that includes 
its generic version of K-Dur 20--an order is appropriate here to 
prevent a recurrent violation.
    Paragraph II of the order covers agreements to resolve patent 
infringement disputes. It bars agreements wherein (1) The NDA holder 
makes payments or otherwise transfers something of value to the ANDA 
filer and (2) the ANDA filer agrees not to market its product for some 
period of time, except under certain limited circumstances described 
below. The ban in Paragraph II includes not only settlements of ongoing 
patent infringement litigation, but also agreements resolving claims of 
patent infringement that have not resulted in a lawsuit (see Paragraph 
I.O.). In addition, by virtue of the definition of ``Agreement'' in 
Paragraph I.D., the order makes it clear that the prohibition on 
payments for delayed generic entry would cover such arrangements even 
if they are achieved through separate agreements (for example, where 
one agreement resolves the patent infringement dispute and another 
provides for the payment for delayed entry).
    The order prohibits not merely cash payments to induce delayed 
entry, but, more broadly, agreements in which the NDA holder provides 
something of value to the potential generic entrant, and the ANDA filer 
agrees in some fashion not to sell its product. Although all of the 
pharmaceutical agreements that the Commission has challenged to date 
have involved cash payments, a company could easily evade a prohibition 
on such agreements by substituting other things of value for cash 
payments. Thus, to protect against a recurrent violation, the order is 
not limited to cash payments.
    The proposed order distinguishes between the first ANDA filer (the 
party eligible for the 180-day market exclusivity period under the 
Hatch-Waxman Act) and later filers. It bars giving ``anything of 
value'' to the first ANDA filer, but would permit NDA holders to grant 
other ANDA filers a delayed license to manufacture the ANDA product. 
The proposed order makes this distinction because an agreement by a 
later filer to refrain from entering does not block entry by other 
potential competitors. Where the only value granted by the NDA holder 
is the license to sell the ANDA product, there is no payment to distort 
the generic's incentive to seek the earliest possible entry date. In 
the case of the first ANDA filer, however, any agreement with an NDA 
holder that involves a promise by the generic firm not to enter the 
market risks blocking entry by other potential generic competitors, and 
therefore such agreements are subject to the general prohibition of 
Paragraph II of the proposed order.
    As noted above, the proposed order would create a limited exception 
to Paragraph II's ban on giving value for delayed entry. This exception 
addresses the possibility that there might be some agreements that fall 
within the terms of the prohibition in Paragraph II that the Commission 
would not wish to prohibit. For example, as was previously discussed, 
the proposed order would ban not only agreements involving cash 
payments of the type that the Commission has challenged to date, but 
also the giving of other things of value. It is possible, however, that 
the giving of some non-cash items in a settlement that did not provide 
for immediate entry by the ANDA filer could promote competition. Thus, 
the order includes a mechanism that would permit consideration of such 
arrangements.
    The exception that has been crafted in this matter could arise only 
in situations where Respondent AHP presents the agreement to a court in 
connection with a joint stipulation for a permanent injunction. In that 
circumstance, Paragraph II will not bar an otherwise prohibited 
agreement, if the following conditions are met:
     First, Respondent must follow certain procedures designed 
to provide notice and information both to the Commission and the court: 
(1) Along with the joint stipulation for permanent injunction and the 
proposed agreement, Respondent must provide the court with a copy of 
the Commission's complaint, order, and the Analysis to Aid Public 
Comment in this matter; (2) at least 30 days before submitting the 
stipulation to the court, Respondent must provide written notice (as 
set forth in Paragraph V of the order) to the Commission; and (3) 
Respondent may not oppose Commission participation in the court's 
consideration of the request for permanent injunction; and
     Second, either: (1) The court issues a permanent 
injunction and the parties' agreement conforms to the court's permanent 
injunction order; or (2) the Commission determines that the agreement 
does not raise issues under section 5 of the FTC Act.
    The proviso to Paragraph II also makes it clear that the order 
would not

[[Page 8539]]

prevent Respondent AHP from unilaterally seeking relief from the court. 
The proviso sets forth conditions under which AHP could seek to avoid, 
though court action, the bar on agreements that is set forth in the 
core prohibition of Paragraph II of the proposed order. These 
conditions would not affect AHP's ability to take action that did not 
involve an agreement otherwise prohibited in Paragraph II.
    The Commission recognizes that, outside of the class action 
context, final settlements between private litigants ordinarily are not 
scrutinized by courts. Unlike the case of a court-ordered preliminary 
injunction based on a stipulation of the parties (the situation 
addressed in Paragraph IV, discussed below), the court in the final 
settlement context has no express legal mandate to consider the public 
interest. Thus, there remains some degree of risk that an 
anticompetitive agreement could escape the prohibition of Paragraph II 
if the parties were able to persuade a court to issue their agreement 
as a permanent injunction. On the other hand, it is also relatively 
rare for courts in ordinary private litigation to issue settlement 
agreements as permanent injunction orders. This is likely to reduce the 
risk that an anticompetitive agreement would evade the order, because, 
as noted above, the exception to the prohibitions of Paragraph II does 
not arise unless the court issues a permanent injunction order. On 
balance, in light of all the circumstances of this proposed consent 
order (including that it is the first involving a challenge to a final 
settlement with a second ANDA filer), the Commission believes that the 
exception contained in Paragraph II is appropriate here.
    Paragraph III prohibits agreements between an NDA holder and an 
ANDA filer in which the ANDA filer agrees not to develop or market a 
generic drug product that is not the subject of a claim of patent 
infringement. The Commission has previously considered this type of 
restraint in the context of an agreement between an NDA holder and an 
ANDA first filer (that is, the party possessing an unexpired right to 
Hatch-Waxman 180-day exclusivity), and had limited the bans in previous 
orders to that context. Having now considered a similar restraint in an 
agreement involving a later ANDA filer, the Commission believes it is 
appropriate to extend this prohibition to agreements between an NDA 
holder and any ANDA filer.
    Paragraph IV addresses what are sometimes referred to as interim 
settlement agreements. It covers agreements that involve payment to an 
ANDA filer and in which the ANDA filer agrees not to enter the market 
for a period of time, but the patent infringement litigation continues. 
AHP would be barred from entering into such interim agreements. As in 
Paragraph II, it extends beyond cash payments to cover the NDA holder's 
providing ``anything of value'' to the ANDA filer, and provides an 
exception in limited circumstances, similar to those described in 
connection with Paragraph II of the proposed order. Although the 
challenged conduct here was an agreement in connection with a final 
settlement of litigation, rather than an interim agreement, this 
provision is appropriate in light of the serious antitrust concerns 
raised by interim agreements and the need to impose an order to prevent 
recurrence of violations similar to that with which AHP is charged.
    The form of notice that Respondent AHP must provide to the 
Commission under Paragraphs II and IV of the order is set forth in 
Paragraph V. In addition to supplying a copy of the proposed agreement, 
AHP is required to provide certain other information to assist the 
Commission in assessing the potential competitive impact of the 
agreement. Accordingly, the order requires Respondent to identify, 
among other things, all others known by AHP to have filed an ANDA for a 
product containing the same chemical entities as the product at issue, 
as well as the court that is hearing any relevant legal proceedings 
involving Respondent. In addition, Respondent AHP must provide the 
Commission with certain documents that evaluate the proposed agreement.
    The proposed order also contains certain reporting and other 
provisions that are designed to assist the Commission in monitoring 
compliance with the order and are standard provisions in Commission 
orders.
    The proposed order would expire in 10 years.

Opportunity for Public Comment

    The proposed order has been placed on the public record for 30 days 
in order to receive comments from interested persons. Comments received 
during this period will become part of the public record. After 30 
days, the Commission will again review the agreement and the comments 
received and will decide whether it should withdraw from the agreement 
or make the proposed order final.
    The purpose of this analysis is to facilitate public comment on the 
agreement. The analysis is not intended to constitute an official 
interpretation of the agreement, the complaint, or the proposed consent 
order, or to modify their terms in any way.

    By direction of the Commission, Chairman Muris not 
participating.
Donald S. Clark,
Secretary.
[FR Doc. 02-4374 Filed 2-22-02; 8:45 am]
BILLING CODE 6750-01-P